Google went from “Search is dead” to “Google might be the most valuable company because of AI,” fueling a 70% rally in just half a year. Congrats to those who realized that search wasn’t dead and captured those fast gains. To me, this wasn’t a difficult call, quarter after quarter, it was clear that search was performing better and better.
However, is GOOGL still a bargain after a 70% rally? Lets look into it.
When I evaluate whether a stock is a bargain, I typically use discounted models for Free Cash Flow (FCF), Earnings Per Share (EPS), and revenue. I base these models on conservative growth rates and terminal valuations, which give me both an expected-case and worst-case fair value.
After making the model, I can adjust the expected CAGR return, to determine the expected returns to justify the current market cap. So I will provide what we can expect Google stock will return every year (on average) the next 10 years.
From there, I look for at least a 12.5% compound annual growth rate (CAGR) over the next 10 years. That may sound aggressive, but it builds in a margin of safety while ensuring my returns are likely to outperform the S&P 500.
Once the model is built, I adjust the expected CAGR to see what kind of return the current market cap implies together with the expected growth rates and terminal valuations.
Anyways here are the results:
FCF: 6% to 7.5% CAGR
EPS: 11.5% to 14.5% CAGR
Revenue: 5% to 7% CAGR
So is GOOGL a bargain at today's price?
Probably not.
Expecting annual returns of around 7%, or as low as 5% under worse assumptions, is not particularly exciting. Note that EPS return estimates are likely inflated due to share buy backs.
That said, this is not a case for selling. GOOGL remains my largest position. Google is one of the greatest businesses in the world, and apart from Saudi Aramco (big oil), it is the highest-earning company globally, while Google's margins and growth are outstanding.
Holding onto world-class businesses, even when they are trading at okay rather than great prices, is perfectly fine. But I will not be adding to my position at current levels.
For me this is a clear hold.